Falling solar prices good for climate, bad for firms

There is a bright side to the plunge in solar panel prices that has brought down some U.S. and German manufacturers which relied too heavily on subsidies for green energy - solar power costs have fallen faster than anyone thought possible. Solar is now nearly as cheap as conventional sources in Germany's electricity grid.

The falls in prices for photovoltaic components, pushed down by economies of scale and fierce competition from China, have made solar nearly as cheap as conventional sources in Germany's electricity grid.

The boom in Germany, the world's biggest photovoltaic market with 24,000 megawatts of installed capacity, has also helped to drive down costs worldwide, making solar a more viable and accessible alternative to fossil fuels in places ranging from India and the Middle East to Africa and North America.

The unexpectedly rapid drop in global solar prices has nevertheless hit some equipment makers hard - producers like Solyndra in the United States and Solon in Germany that failed to keep pace and ended up in bankruptcy protection.

The demise of Solyndra, which had got $535 million in loans from the U.S. government, is sometimes cited by sceptics as evidence of the dangers associated with supporting the industry with incentives. They argue subsidies waste public money.

"Everyone's missing the real story and it's amazing how brain dead some people are," said Jeremy Rifkin, an adviser to the German government and European Union on climate change and energy security. "It's absolutely a positive thing that solar prices are dropping faster than anyone thought they could.

"It's actually a great success," the U.S. economist told Reuters. "Those criticising solar for that are being ignorant or disingenuous. It's a winnowing out process similar to what the computer and communications sectors went through. More companies that can't stay ahead of the curve will go belly up."

CHEAP SOLAR POWER

Germany is the biggest market for solar power despite its heavy clouds and northern latitude. A robust legal framework that forces utilities to buy solar power at above-market rates has more than negated these disadvantages, turning Germany into the world's top testing ground for photovoltaic energy.

Yet due to plunging prices for components, solar power prices in Germany have been halved in the last five years and solar now generates electricity at levels only a few cents above what consumers pay. The subsidies will disappear entirely within a few years, the German BSW solar association says, when solar will be as cheap as conventional fossil fuels.

Germany has added 14,000 megawatts capacity in the last two years alone and now has 24,000 MW in total - enough green electricity to meet nearly 4 percent of the country's power demand. That is expected to rise to 10 percent by 2020. Germany now has almost 10 times more installed capacity than the United States.

Germany's government-mandated "feed-in tariff" (FIT) is the engine of growth. The FIT is the guaranteed fee utilities are obligated to pay a million producers of solar power for a period of 20 years. It fell to 24 euro cents per kWh for new plants in 2012 from 57 cents in 2004. Since 2010 semi-annual cuts in the incentives have accelerated, dropping the FIT from 43 cents.

"The growth of solar in Germany in the last few years has been just incredible," said Martin Jaenicke, head of environment policy research at Berlin's Free University, noting solar power is the world's most abundant source of energy.

"People sometimes call solar power expensive. But once the capital equipment is paid off, it's an unbelievably cheap source of energy. Ideally, subsidies eventually eliminate themselves and that is exactly what is happening in Germany."

Yet solar remains a relatively expensive source of power, even in Germany where consumers are forced to pay a surcharge of some 7 billion euros annually on their electricity bill to pay for the above-market rates that solar power producers get.

The incentives pay for the costs of the 1 million rooftop power plants installed in the last decade. The German government that wrote the Renewable Energy Act in 2000 had had more modest ambitions. They hoped to have 100,000 rooftop power plants.

"It's important that electricity remains affordable," said Economy Minister Philip Roesler, who argues new installations should be capped at 1,000 MW per year. "We need to tackle the causes of rising costs and it is above all photovoltaic."

Tom Mayer, chief economist of Deutsche Bank, said it was reasonable to support the sector before but it's now "high time" to cut the subsidies by 30 to 40 percent with prices falling to about 15 cents per kWh -- 8 cents below the retail price.

"Now that the technology is mature, high subsidies are no longer needed," Mayer said in a research note. Even if some firms will perish, he said: "Leading producers on the world market can cope with (lower) prices."

SURVIVAL OF FITTEST

"It's remarkable how fast photovoltaic prices fell towards grid parity," said Peter Ahmels, head of renewable energy at the German Environmental Aid Association (DUH). "Germany will hit grid power parity next year -- three years faster than thought."

As solar gained popularity in Germany and market prices for components fell, the government reacted by speeding up cuts in the FIT and is now mulling plans to cut the incentives faster to under 20 cents later this year.

Claudia Kemfert, an energy expert at the DIW economic think-tank, said economies of scale from Germany's boom and technology innovations are behind the fall in solar prices. But she agreed Germany's FIT should fall faster.

"The competition is getting tougher all the time," she said. "That's why some German solar companies might not survive."

Falling prices for solar power have hit the earnings and the stocks of many solar firms. Along with Solon and Solyndra, Solar Millennium, Evergreen Solar and SpectraWatt have sunk into insolvency.

Rifkin, the U.S. economist, said more firms that cannot keep up will fail.

"This is disruptive but it's a success and it's moving so quickly," he said. "Germany is leading the way. Solar prices will keep falling. Grid parity is going to be reached in many countries between now and 2015 and that's a good thing. I don't think the world will need any more subsidies for solar by 2020." (Reporting By Erik Kirschbaum; editing by Stephen Brown and Anthony Barker)